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China’s natural gas opportunity

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China’s natural gas opportunity

By Peter Ward

About gas

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China, the most populous country in the world, plans to open up its upstream oil and gas sector to foreign private investment. It is an industry which has long been monopolized by state-owned companies…

As the country battles to meet emission targets, China’s natural gas production and consumption is set to increase, with the demand set to be met by higher production and more imports.
In May, the official Xinhua News Agency reported that a recent guideline, issued by the Central Committee of the ruling Communist Party and the State Council, stated that companies that are granted access and accreditation would be allowed to undertake crude oil and natural gas exploration and exploitation in the country. This would be on the condition that the work was done in a protective and sustainable way, according to the report.
International companies will be able to invest in projects in China through joint ventures with the country’s three major national energy companies: China Petroleum and Chemical Corporation, China National Petroleum Corporation, and China National Offshore Oil Corporation.
China hasn’t offered a timeline for licensing foreign companies to drill, but it’s a fair assumption that the country will look to incentivize the production of cleaner fuels in order to reduce its current dependence on coal.

Factories and power plants in China currently burn half of the world’s coal, a statistic which makes it difficult to imagine the Asian nation meeting its emission reduction targets. Chinese coal consumption made up two-thirds of its energy use in 2015, and China’s gas demand must increase by between 13 percent and 15 percent annually up to the end of the decade if it will meet the higher end of the government’s targets, analysts at UBS and Sanford C. Bernstein estimate.
Equity research firm Jefferies, backed those figures up. “According to our calculations, China’s natural gas demand grew 8.3 percent in 2016. The 13th Five-Year Plan calls for natural gas to supply 10 percent of energy in 2020, up from 6 percent in 2015,” the company wrote. “To reach this level, gas demand needs to increase ~14 percent per annum. While we believe that is a stretch, ever more restrictive environmental regulations should push demand growth to ~10 percent levels, in our view.”
As prices of coal have dipped in recent months, some have feared the country will rely even more heavily on the dirtier fuel. “As coal prices look destined to drop to around 500 yuan a ton this year, the conversion to natural gas will stop, and some price-sensitive industrial users may even think of switching back,” Tian Miao, of Beijing’s North Square Blue Oak Ltd., told Bloomberg.
Prices of coal almost doubled in the 12 months up to November last year, due to a reduction on output of the resource, but prices have risen again since.

An expensive hope

But there is hope that natural gas will play a bigger role there in the future. Right now natural gas is an expensive part of China’s fuel mix, but there is an increasing demand for both domestic and important supplies. Consumption in April 2017 was 22 percent higher than the same month a year earlier, according to data from the National Development Reform Commission.
These figures give hope that China can hit its goal of getting 10 percent of its energy from gas by 2020, despite the government introducing a lower band of targets in January. The chances of succeeding may improve with increased gas imports.
In May 2017 it was revealed that the U.S. and China had struck an agreement to make it easier for Chinese companies to buy Liquified Natural Gas (LNG) from American suppliers. America is one of the world’s biggest LNG producers and is seeking to export more of its supply, which it says will not affect prices at home, providing sales stayed lower than 30 percent of total output.
“This will let China diversify, somewhat, their sources of supply and will provide a huge export market for American LNG producers,” Commerce Secretary Wilbur Ross told reporters in a White House briefing.

Jungliangcheng Power Plant (Shubert Ciencia, Wikimedia)

Growing demand globally

Natural gas demand is expected to grow faster than oil and coal through 2035 globally, according to BP’s annual outlook. China will be one of the main drivers of that growth, along with the Middle East and the U.S. “Asia remains the largest destination for LNG. China, India and other Asian countries all increase their demand for LNG, helping gas to grow faster than either oil or coal in each of these economies,” the outlook reads.
China’s move to allow foreign investment in its oil and gas sector will be crucial to its efforts to lower emissions and meet its clean fuel targets. It seems likely the gas subsidies and coal taxes will follow, lowering the currently high cost of producing natural gas. Together with increased imports from the likes of the U.S., this could lower China’s reliance on coal, and give the country a fighting chance of lowering pollution levels.

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